SF Apartment : December 2016


The Big Chill

by Jay Greenberg

As I’m writing this article in late October, sitting on a rooftop watching the Blue Angels fly by after several beautiful Indian summer days, the wind is picking up and blowing cool air off the Pacific and the San Francisco Bay and bringing the hot city back to a cooler temperature. This very scenario took place in the city’s real estate market through 2016. A cooling trend has shifted the market from what was red hot the past few years. This article is a year-over-year comparison for value indicators and sales velocity. Pricing remains strong and gross rent multipliers are reflecting the cooling trend in the market. With the arrival of the fourth quarter, we are seeing increased inventory and multiple offerings for larger buildings that have been scarce all year. With increased inventory and pricing adjustments that have already taken place, current activity levels in the fourth quarter are strong.

The following are approximate statistics for January 2016–September 2016, pertaining to the 5-9-unit sector versus the same time period for 2012, 2013, 2014, and 2015. The average price per square foot went from $328 a foot in 2012, to $373 a foot in 2013, to $465 a foot in 2014, and to $448 per foot in 2015. In 2016, the average price per foot jumped to $564. Gross Rent Multipliers had been on the rise since 2009 and now we are retreating from last year’s high. The average GRM was 15.55 times gross in 2012, 16.69 times gross in 2013, and 19.51 times gross in 2014. In 2015, the GRM jumped again to an impressive 21.48 times gross, and in 2016, the average GRM notched down to 18.55 times gross.

The cost per unit has increased each year from $285,000 in 2012, to $318,000 in 2013, to $374,000 in 2014, and to $379,000 in 2015. In 2016, average price per unit had a significant jump to $460,000 per unit. In summary, we had a significant decrease in GRMs and significant increases in price per foot and price per unit.

Dollar volume for the 5-9-unit sector (through the end of September) was $130 million in 2012, $165 million in 2013, $178 million in 2014, $169 million in 2015, and $220 million in 2016. The number of transactions in 2012 was 72 sales, 2013 had 79 sales, 2014 had 77 sales, 2015 had 64 sales, and in 2016 we had 73 closings. In summary, the median number of sales in this category over the past six years is 76, so we are slightly below the median number with 73 closings to date this year, and that is coinciding with an all-time high dollar volume of $220 million.

For the 10-plus-unit sector in the same time period, the average price per square foot has had impressive gains the past few years. In 2012, the average price per square foot was $269. In 2013, the cost per foot leaped to $393, and again in 2014 to $425 per foot, and in 2015 to $471 per foot. The average price per square foot for 2016 has skyrocketed to $635. Gross Rent Multipliers in the 10-plus-unit sector have increased each year for the past five years, but following the same trend as the 5-9-unit sector, they have decreased in 2016. The average GRM was 11.93 times gross in 2012, 14.54 times gross in 2013, 15.81 times gross in 2014, and 17.01 times gross in 2015. For 2016, the average GRM has dipped to 16.11 times gross. The cost per unit has moved from approximately $175,000 per unit in 2012, to $311,000 per unit in 2013, to $315,000 per unit in 2014. Again, not wanting to buck the trend, price per unit jumped significantly to $368,000 in 2015 and continues to rise in 2016 with a new high price per unit at $390,000. The results mirror the 5-9-unit sector with the GRM dropping and the price per foot and price per unit rising.

Dollar volume for the 10-plus-unit sector was approximately $451 million in 2012 for the same time period (through the end of the September), $458 million in 2013, and $336 million in 2014. Dollar volume in 2015 was the lowest figure we have seen in the past five years at $320 million; and in 2016, volume has dropped even further to the lowest number we have seen since the bottom of our market in 2009 with $285 million recorded. The number of transactions was approximately 83 in 2012, 53 in 2013, and 85 in 2014. Again, following the trend, for 2015 we had the lowest reported number of transaction for the five-year reported window with 49 closings. Another new low has been set in 2016 since the bottom of our market in 2009 with 43 recorded sales through third quarter this year. In summary, the 5-9-unit sector has had an average number of sales and all-time high dollar volume, and in the 10-plus-unit sector, we have the lowest sales and dollar volume since 2009.

The sources of the numbers reported are Jay Greenberg & Trigg Splenda Alain Pinel xsInvestment Group, San Francisco Multiple Listing Service, and Costar Comps.

Since Labor Day weekend, a significant number of offerings have come to the market. By far, we currently have more inventory and available product than we’ve had any other time this year (fourth quarter 2016), with 40 multi-family offerings available at this time (last week of October). The current inventory is split evenly between 10-plus units and 5-9 units. Throughout the year, there has been a steady diet of offerings in the 5-9-unit sector, and now, for the first time this year, there are options for buyers in the 10-plus-unit sector. There are several high-profile Pacific Heights trophy buildings that recently came to the market and, as expected, a bidding war followed. Inventory for large high-quality buildings has been scarce all year, so it was no surprise that the trophy properties attracted a large crowd and multiple offers. Several large buildings recently came to the market in the Tenderloin and are now in their initial marketing period. The properties are well priced and show well; we will see if the interest level for large Tenderloin buildings is similar to what it has been in other less management-intensive neighborhoods. Veritas Investments—the most active buyer since the market crashed in late 2008 and began anew in 2009—continues to lead the market as the most active buyer in 2016; additionally, they had a large portfolio sale earlier this year and some high-quality individual offerings.

Activity levels early in the year and through the summer had been waning. In early August, I held an open house on the Tuesday Tour for a quality listing and nobody showed up. That was the first time that has happened in my 25 years of selling San Francisco apartments. Investors and operators were feeling the shift in the market with slipping rents and longer vacancy periods. In the past few years, vacancies were more valuable than a recently rented unit. Today, multiple vacancies is not a positive selling point, and projected rents are being scrutinized.

In my opinion, activity has picked up in the fourth quarter with significantly higher foot traffic at showings and stronger activity levels, coinciding with the pricing adjustment of lower gross rent multipliers, which is demonstrated in the statistics above.

A bigger shift has occurred in the rental market with rents dropping 10%–15% across the board year over year. What used to rent in a few days is now taking a few weeks. Newly constructed inventory is experiencing a steeper decline with many ads offering reduced security deposit, free first month’s rent, and free parking for the first six months. The apartment rental market follows the downtown office leasing market, which also appears to be in a state of flux. The San Francisco office leasing market just reported their slowest third quarter in the past five years. On the flip side, Twitter listed 184,000 square feet for sub-lease at their Mid-Market headquarters and received multiple offers in a short period of time. Although vacancy rates have been creeping higher and rents have been dropping, San Francisco is still one of the strongest rental markets in the country. What had been fueling the rental market since the last recession was job growth—specifically tech jobs. In the first six months of 2016, hiring slowed and the tech boom chilled, coinciding with new rental housing inventory. In mid-summer there was a big push in hiring. Jobs are the key to our housing market, and only time will tell what direction the job market and real estate market are headed. 

Jay Greenberg is with Alain Pinel Investment Group and can be reached at 415-593-8615.